More Companies, Investors Are Choosing Notes That Float

By Michael Aneiro

Regular readers of Barron’s and this blog have been following the rising recent investor interest in floating-rate notes, at a time of rising concerns about rising interest rates. Also rising is the willingness of companies to issue floating-rate notes, which can be mutually beneficial for investor and issuer alike but basically pits the issuer and the buyer on opposite sides of the bet about when and whether rates will rise. Patrick McGee covers the subject in the Wall Street Journal today:

As sales have soared, the rates offered by issuers to lure investors have fallen, reducing the cost of funding for some of America’s largest corporations. In the past month, International Business Machines Corp., (IBM), PepsiCo Inc. (PEP) and Caterpillar Inc. (CAT) have sold these notes. Payments to bondholders are often just a slight premium to the three-month London interbank offered rate, which is currently around 0.3%. Walt Disney Co. (DIS) and Coca-Cola Co. (KO) sold bonds below Libor.

The success of “floaters” underlines investors’ fears of a rate-raising cycle. Many forecasters expect rates to rise this year as the U.S. economy picks up steam. Such a development would leave investors who bought fixed-rate debt at the current low rates with paper losses. To hedge, many investors are buying floaters, even though the notes typically pay less interest than comparable, plain-vanilla fixed-rate bonds….

If interest rates do go up significantly, that would be a boon for investors at the expense of borrowers, who could see their interest expense balloon. Sellers of floating-rate notes usually don’t have the right to buy them back from investors.

Amey Stone is Barron’s Income Investing blogger and Current Yield columnist. She was formerly a managing editor at CBS MoneyWatch, MSN Money and AOL DailyFinance. Her responsibilities included overseeing market coverage and personal finance topics. Prior to those roles, she was a senior writer at BusinessWeek where she authored the Street Wise column online and contributed to the magazine’s Inside Wall Street column. Topics covered included economics, corporate finance, Fed policy, municipal bonds, mutual funds and dividend investing. She co-authored King of Capital, a biography of Citigroup Chairman Sandy Weill. She is a graduate of Yale University and Columbia University’s Graduate School of Journalism.